Following the financial crisis in 2008, the reaction was to increase the number of staff employed in compliance roles hugely. Infamously, Citibank published an annual report detailing 30,000 compliance staff.
But throwing staff at this issue has not paid the expected dividends:
- The average time to identify a data breach in 2020 was 228 days
- The average time to contain a data breach in 2020 was 80 days
- UK Fraud losses have risen by 30% in H1 2021
- GDPR fines surge by 113% in 2021
Just as it was clear that technology fuelled the financial crisis, it is also part of the solution, as is recognised in the FCA definition of RegTech:
"A sub-set of FinTech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities."
Drivers of compliance transformation
Businesses now recognise that the old model is not sustainable because of a number of drivers of change transformation.
Cost of compliance
The ongoing cost of compliance in just 11 EU member states was €11.bn in 2020. Whilst in the US, businesses incur a $10k regulatory cost per employee.
Recently there has been a 74% increase in investor-related ESG disclosure regulations. And there were over 400 responsible investment policy interventions across Europe in 2020. A trend that is bound to continue and escalate.
In 2020, Burmark estimated that regulators published around 300 million pages in a single year. And in 2021, we’ve seen a 39% increase in GDPR fines, an area of regulation that affects almost every business.
70% of RegTech vendors saw the pandemic as a ‘watershed moment’, with 92% believing that it positively impacted the adoption of cloud-based products.
How can RegTech help compliance?
In an influential article, Law Professor Douglas Arner and his research team claim that RegTech has the potential to ‘lead to a paradigm shift in regulation’, enabling real-time surveillance of the financial markets and even predicting where risks and problems will emerge, ultimately moving supervision and enforcement from a reactive endeavour to one that is preventative.
At the Skillcast Transforming Compliance Summit, I spoke about the case for technology as a compliance solution and the RegTech market landscape in 2021.
Whether or not you agree with Arner, there is general consensus about the shorter-term benefits which RegTech can deliver:
- Discovering greater insights for decision making
- Improving efficiency and effectiveness
- Boosts morale and productivity by replacing mundane tasks
There are a number of misconceptions around RegTech capabilities, it can often be assumed that these technologies just automate basic tasks, or are simply there to serve financial markets.
The reality is, compliance is a challenge for any organisation and we are seeing a growing number of RegTech vendors develop solutions that are ‘regulation agnostic’, meaning these tools can be utilised to support almost any organisation, no matter their specific compliance requirements.
RegTech Use Cases
Our taxonomy highlights the breadth of use cases available across these solutions. Across just two categories, ESG and General Compliance there are at least a dozen ways that RegTech solutions can be harnessed.
Climate Risk Analytics: Products in this category include those which are aimed at helping financial institutions determine the financial risks associated with climate change so they can better understand their overall exposure.
Compliance Automation: Products focusing on making compliance automated and tech-enabled so as to make compliance efficient, swift and scalable.
Carbon Footprint Tracking: These products are aimed at retail bank customers and typically use the open banking framework to allow bank customers to track the carbon footprint of their transactions.
ESG Ratings and Analytics: Products in this category provide additional insights and analysis as well as provide a source of data.
ESG Risk Management: This category focuses on products that help firms manage their ESG risks at an enterprise level, providing platforms and dashboards to manage and mitigate ESG risks.
ESG Sustainability Reporting and Disclosures: Products in this category focus on the reporting and disclosure obligations included in regulations as well as the requirements of industry standards bodies.
Marketing Compliance: Products that ensure that an organisations marketing, advertising and sales content comply with relevant industry rules and regulations.
Mortgage Compliance: Mortgage compliance software runs compliance checks and loan audits in real-time to comply with relevant regulations for residential loan documents.
Operational Efficiency Solutions: Products that focus on making the operations of an organisation more efficient.
Supplier Management: Products focusing on streamlining supply chains to ensure buyers can achieve responsible and sustainable outsourcing.
Sustainability Management: Products in this category allow businesses and corporates to manage all aspects of their ESG performance, from creating and tracking ESG targets and collecting data against those targets.
Training & Learning Solutions: Software products that facilitate the education of employees on laws or regulations applicable to their job function or industry.
Technologies Leveraged by RegTech
The technology behind these software products has been greatly enhanced in recent years, and we’re now seeing ever more complex AI and machine learning algorithms taking centre stage across each of RegTechs sub-verticals. Below is a list of a few of the common technologies, and their use cases in RegTech.
Application Programming Interface (API)
A computing interface that relays information between multiple software intermediaries.
Artificial Intelligence (AI)
The development of intelligent machines which think and work like humans.
Biometrics are body measurements and calculations related to human characteristics.
The delivery of computing services (servers, databases, software etc.) over the internet to offer faster innovation and scalability.
Robotic Process Automation (RPA)
Software-based technology that can be easily programmed to automate basic, repetitive tasks.
Why should your compliance strategy change?
By shifting the compliance mindset to focus on becoming proactive and acting in anticipation of future problems, needs, or changes, you can reduce the likelihood and impact of compliance breaches.
A strong investment and ROI case can be made for compliance as a means for reducing cost. It can also act as a route to competitive advantage by boosting performance and satisfaction.
Human assets need to be leveraged better. Use technology to automate iterative tasks leading to fewer human errors and happier (hence more productive) staff.
KYC solution provider Passfort recently released a research report which brings some of these points to life. This research addressed a sample of 500 UK financial services consumers who had acquired a new financial product from their bank or building society in the previous twelve months.
The results of this piece showed that customers who received a better than expected onboarding experience:
- 75% were more likely to recommend their provider
- 60% were more likely to buy more products
- 50% were less likely to make a complaint
- 49% were less likely to switch providers
Want to learn more about compliance?
If you’d like to stay up to date with compliance best practices, industry insights and key trends across regulatory compliance, digital learning, EdTech and RegTech news, subscribe to the Skillcast Compliance Bulletin.
You can follow our ongoing YouGov research into compliance issues, attitudes and risk perceptions in the UK workplace through our Compliance Insights blogs.
Last but not least, we have 80+ free compliance training aids, including best practice guides, checklists, desk-aids, eBooks, games, handouts, posters, training presentations, webinars and even e-learning modules!
If you’ve any questions or concerns about compliance or e-learning, please get in touch.
We are happy to help!